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A company wishes to use financial futures to hedge its interest rate exposure. The company will sell 10 Treasury futures contracts at $138,000 per contract.

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A company wishes to use financial futures to hedge its interest rate exposure. The company will sell 10 Treasury futures contracts at $138,000 per contract. It is Jul and the contracts must be closed out in Dec of this year. Long-term interest rates are currently 13.30%. If they increase to 14.30%, assume the value of the contracts will go down by 5%. Also if interest rates do increase by 1.20%, assume the firm will have additional interest expense on its business loans and other commitments of $53,000. This expense will be separate from the futures contracts. a. What will be the profit or loss on the futures contract if interest rates go to 14.50% by Dee when the contract is closed out? (2 Marks) b. After considering the hedging process in part (a), (i) What is the net gain (or cost) to the firm once the increased interest expense is accounted for? (1 Mark) (ii) What percent of this $53,000 cost did the company effectively hedge away? (1 Mark) c. At what point would it be best for the company to buy rather than sell futures contracts? Explain your answer. A company wishes to use financial futures to hedge its interest rate exposure. The company will sell 10 Treasury futures contracts at $138,000 per contract. It is Jul and the contracts must be closed out in Dec of this year. Long-term interest rates are currently 13.30%. If they increase to 14.30%, assume the value of the contracts will go down by 5%. Also if interest rates do increase by 1.20%, assume the firm will have additional interest expense on its business loans and other commitments of $53,000. This expense will be separate from the futures contracts. a. What will be the profit or loss on the futures contract if interest rates go to 14.50% by Dee when the contract is closed out? (2 Marks) b. After considering the hedging process in part (a), (i) What is the net gain (or cost) to the firm once the increased interest expense is accounted for? (1 Mark) (ii) What percent of this $53,000 cost did the company effectively hedge away? (1 Mark) c. At what point would it be best for the company to buy rather than sell futures contracts? Explain your

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